There's a fascinating article on the Tax Justice Network blog today on the subject of information exchange for tax purposes. I know that sounds hard to believe, but I mean it: not least because information exchange is key to tackling tax evasion that imposes and enormous cost - in excess of £1,000 a year each - on everyone in the UK.

What Markus Meinzer of Tax Justice Network has found is a stunning endorsement for information exchange from a rather surprising source: the UK Treasury. This paper was written in February 2000, while the EU Savings Tax Directive was still being thrashed out, and it is unequivocal.

This is important, because Swiss bankers and others are telling everyone they can that it is far better to apply withholding taxes on dirty money sitting in or routed through Swiss and other banks, than to shine daylight onto them, because . . . well, we find it hard to follow their line of argumentation. And the current UK government appears to have swallowed the Swiss line, wholesale.

Although it is theoretically possible to have both effective information exchange and withholding taxes, in practice the UK has placed itself in a position of either one or the other. This is because it has chosen to sign a deal with Switzerland which endorses withholding taxes - but whose main purpose, sotto voce, has been a political one: to sabotage wider European efforts to produce transparency through the European-wide transparency project, the Savings Tax Directive. (Read more about some of the subtleties involved in that particular political chess game here and here.)

So here is what the UK Treasury had to say, back in 2000.

The UK believes there are seven key advantages to exchange of information.

First, exchange of information allows for the right amount of tax due on the income from savings to be collected. For those countries which tax the savings income of their residents at the marginal rates which apply to income in general, a withholding tax is unlikely to be the marginal rate at which the investor should be paying tax in his state of residence.

Second, exchange of information allows savings income to be taxed in the right country - that is, the investor's state of residence rather than solely in the state of source for the investor's savings income. The "co-existence approach" [TJN: permitting E.U. states to choose to apply either withholding tax or information exchange] does not allow for this and this is why several Member States have argued for revenue sharing.

Third, exchange of information encourages compliance with the tax system. It provides a deterrent to the non-declaration or under-declaration of income. In contrast a withholding system, without exchange of information, might appear to give the impression of legitimising tax evasion since it fails to deter non-declaration. Acceptance by the EU of the "co-existence" model in Community legislation might be interpreted by taxpayers as a signal that non-declaration to the taxpayer's state of residence will be tolerated.

Fourth, exchange of information helps wider compliance with the tax systems of Member States, including tackling the serious problem of cross-border "laundering" of the proceeds of tax evasion. Exchange of information will often draw the attention of the country of residence to the existence of an asset which may have been funded from income, profits or gains which have themselves been hidden from the tax authorities. In turn, these activities could now be taxed. Withholding conveys none of these advantages.

Fifth, exchange of information is easy and efficient. It would be sufficient to draw the attention of the country of residence to the existence of the income-producing asset - the tax authorities could then seek sufficient information from the investor to work out the tax liability. In contrast, applying withholding might in some circumstances require a financial institution to perform complex calculations not needed for its own purposes. In addition, a withholding system would require additional administrative costs in order to manage tax deductions or investor certification.

Sixth, exchange of information is good for the honest investor, since it does not lead to the cash flow disadvantages associated with a cross-border withholding tax system.

Seventh, exchange of information produces equity between Member States. It precludes the likelihood of capital flight from countries providing information to countries opting for withholding under "co-existence" arrangements. Dishonest investors determined to evade tax will generally prefer to suffer a (minimum) withholding tax rather than have information passed to their country of residence, and will choose where to invest their savings accordingly. This would lead to undesirable distortion of competition, by putting financial institutions in withholding countries at a tax-driven competitive advantage.

Exchange of information for tax purposes is consistent with the trend to greater international co-operation and transparency in international financial systems, encouraged by international initiatives in both tax and non-tax fields. Even if withholding arrangements were adopted by all countries globally, this would not provide an effective solution to evasion of tax on savings income. They would not allow Member States to collect the full amount of tax due on their residents' savings income, nor to deter and detect the "laundering" of the proceeds of tax evasion through investment abroad.

Exchange of information arrangements on a wide international basis is the only way in which an effective solution to the evasion of tax on savings income can ultimately be achieved. And it is the only way that the Helsinki European Council Conclusions can be delivered. Such an approach requires EU countries (as well as important third countries) to set aside those bank secrecy laws which are standing in the way of a solution to tax evasion based on exchange of information. This has already been recognised in a number of important initiatives on the international front aimed at tackling tax evasion, harmful tax competition and international financial crime.

It's a pity they have not lived by what they wrote then and have not argued, consistently, for automatic information exchange since. The world would be a better place of they had.

There's more on this at TJN.